In our quest for efficiency, we have eliminated much of the human element from our mortgage finance system. With automated models for loan qualification, payment processing, and now foreclosure, we have turned the system over to machines and computer algorithms. Most of what we have done in this area has been an improvement, but have we gone too far?

Obama is right to resist the foreclosure wails from the political left.

OCTOBER 19, 2010 — WSJ Opinion

More than three years into the housing bust, the foreclosure mitigation lobby apparently wants to keep the fun going. That will surely be the result if the political uproar over bank "robo-signers" becomes a moratorium on foreclosures.

So far the Obama Administration, to our surprise and perhaps its own, has behaved with admirable sobriety despite the wailing from the political left. Housing Secretary Shaun Donovan indulged in some familiar bank-bashing in an op-ed on the weekend, but he also says a moratorium would be a mistake. Perhaps this is because he knows something about mortgage contracts, including that bank process errors don't add up to an injustice to homeowners who haven't been paying their mortgages for months or years. He also notes that stopping a foreclosure creates unintended victims—such as the potential new buyer.

That is one of the first acknowledgments of the plight of new buyers I have seen in the media. Everyone is so focused on helping out the deadbeats being foreclosed on that we forget that a new buyer — a buyer willing to pay the mortgage — is waiting to move in to their new home. The idea that delinquent borrowers should have their debts forgiven because of a procedural error is ridiculous.

The alleged scandal here is that "robo-signers" for mortgage servicing companies have been signing foreclosure authorizations based on assurances from colleagues, rather than reviewing the files themselves. Some banks and mortgage servicing companies were also sloppy in maintaining records on the ownership of loans. This supposedly leads to horrible consequences for borrowers, though the evidence remains elusive.

The New York Times appeared to have produced a front-page victim on Friday—a woman fighting eviction from her $75,000 home at the hands of lender GMAC. The woman has not paid her mortgage in two years while remaining in the house. Some may view this as a case of rough treatment, but we doubt New York Times subscribers can receive the paper for two years after they stop paying for it.

All the squatters should move out first, then they can sue the lender for whatever they want. If they have a legitimate claim, they will be compensated, and if they don't have a legitimate claim — and we all know none of them do — then they can pound sand.

One left-wing financial blog has compiled news accounts that as many as seven people have unfairly suffered a foreclosure, despite making all payments. That's right, seven in a nation of more than 310 million. Our Journal colleagues also found a borrower who apparently paid her bills but was still charged additional fees by Senator Chris Dodd's favorite mortgage company, Countrywide Financial. As we said last week, whether the number of legitimate victims is seven or eight or more, anyone who paid on time and still suffered at the hands of a bank should be made whole. But on the record so far this is not a case of widespread fraud or injustice.

On the issue of maintaining the documents to establish ownership of a mortgage debt, it's not surprising that the process is messy, given that Fannie Mae and Freddie Mac helped design it. But securitization errors are also process flaws, and they do not entitle everyone to a free house.

Joseph Mason, a Wharton fellow and finance professor at Louisiana State University, states it plainly: "There is no question whether the contracts each party signed were valid. The Borrower owes the money they used to buy the property. The Lender has a claim to that money. Mere delays in providing the right documentation of a perfected collateral claim will not change the situation."

Part of me feels sad for the millions of distressed borrowers who are clinging to yet another false hope for debtor salvation. How many people are lapsing back into denial of their current circumstances because of stories like these? There is no hope that this pre-election emotional nonsense will result in delinquent borrowers getting debt relief. If this story gets people to make three or four more payments, does that benefit anyone other than the banks?

Sloppiness in some financial back offices does not come close to justifying a national foreclosure moratorium. By some estimates such a freeze could cost more than $2 billion per month, and given how involved the unwilling taxpayer has become in mortgage finance, this damage won't necessarily be limited to bank shareholders. This is a nightmare for anyone who wants a healing housing market and investors willing to lend to the next generation of homeowners. It also raises false hopes among delinquent borrowers.

More losses absorbed by taxpayers, more delays in reaching the bottom in prices, and more false hopes that will be dashed later: what a mess.

Backers of a moratorium claim they are upholding the rule of law, while we have allegedly abandoned it in opposing a freeze. This argument has it backwards. We say that disputes over private contracts should be decided on an individual basis under the law. The moratorium crowd wants to use the individual cases as a political lever to enact policies that effectively change the terms of existing contracts—e.g., more loan modifications, reductions in loan principal via bankruptcy court, or a moratorium.

As for the state Attorneys General who are promoting this foreclosure fracas, watch how few of them merely seek to force banks to document ownership, and how many try to muscle banks into settlements with unrelated benefits for the AGs' favored constituencies.

The moratorium lobby also argues that keeping people in homes they can't afford will somehow help the economy. This is of a piece with more than three years of failed policies intended to prevent housing markets from finding a bottom. These policies—begun under George W. Bush and continued under President Obama—have succeeded mainly in prolonging the agony and delaying a recovery.

In a slow-growth, high-unemployment economy still mending from a financial crisis, there are only so many trillion-dollar markets the politicians can destroy without sending America back into recession. Mr. Obama has often seemed indifferent to the economic consequences of political decisions, but on this issue he has correctly perceived the horrendous cost of blowing up the mortgage market again.

The ramifications of this policy go even deeper. The basic conundrum facing the banks is to foreclose or not to foreclose. If they foreclose, and if they process the sales, prices will crash. If they don't foreclose, more borrowers will quit paying, and prices will remain high, but few people will actually be paying them as squatting becomes the norm (Squatting Becoming a Way of Life for Many Delinquent Borrowers).

The mortgage mess that lead to foreclosure freezes by several large banks across much of the country may slow down the ability of banks to issue new mortgages, which could push the housing market into a sharp downward spiral.

The paperwork problem is curable. Banks can go back through the chain of ownership of loans and liens to correct lapses.

But this process is time consuming and costly, especially when some of the original mortgage lenders or intermediary owners of the mortgages have gone bankrupt or been merged into other banks.

In the meantime, borrowers who have defaulted on their loans will likely be able to keep their homes for longer than they otherwise could. (Thinking About Accelerated Default? The Average Squatting Time Is Up to 449 Days) What’s more, banks are likely to find that more foreclosure actions are contested by borrowers as the public and attorneys eager to collect legal fees by fighting foreclosures become more aware of the documentation problems.

I wonder how many people will give their last dollars to attorneys to fight for hopeless dream of regaining their lost property?

All this means that banks will find themselves with more bad loans on their books. The normal pace of run-off of bad loans—delinquency to default, default to foreclosure, foreclosure to sale—has meant banks have not been able to recover revenue on non-performing loans for upwards of a year and a half in much of the country. The new pace of run-off will likely mean that banks are stuck with the non-performing loans for far longer.

The longer it takes for banks to exit bad loans and recover cash, the higher the level of bad loans on the books of banks will get. As the non-performing loan portfolio grows, banks will need to set aside an increasing amount of capital to balance. This will, in turn, mean banks will make fewer home loans until the backlog of bad loans can be cleared up.

In short, the foreclosure crisis has the potential of creating a liquidity crisis for home loans. The actual number of defaults is not necessarily increasing—it’s just taking longer than usual to clear the old non-performing loans. But this means that banks aren’t generating revenue from the foreclosures. It also means that the loan portfolios will appear to be worsening as the percentages of non-performing loans grow.

This process of a liquidity crunch for the mortgage market could be short-circuited if both investors and regulators are willing to provide some relief to banks. Regulators at the FDIC and the Fed could grant dispensation to banks to keep making new loans despite spiking non-performance rates in the home loan portfolio.

We have already granted banks dispensation by allowing amend-extend-pretend. What more do we need to do? Perhaps we should just let them loan out money to anyone with a pulse to fill the buyer pool. Oh, wait, we tried that once, didn't we?

Investors too could look beyond the temporary drop in recovery rates and rising default levels—although this is far from guaranteed. Investors could also panic at the bad numbers and sharply sell-off bank stocks. Bank executives are likely to fear the latter—which would mean that even if regulators grant relief, banks could still hold back when it comes to extending new home loans.

The only reason banks hold back on writing new loans is because there aren't enough creditworthy borrowers available. Anyone who is not already over-indebted, has a job, and has good credit can borrow plenty.

A liquidity crunch in the mortgage market would hit home sales hard. Buyers would discover credit harder to come by and more expensive, which would push down the price of homes even further. Coming after a summer with particularly brutal home sales numbers, this could set the stage for a sharp decline in home prices across much of the country.

And that’s when things will get really scary. A sharp decline in home prices would put even more borrowers underwater. Many buyers who are already underwater but hoping for a home price recovery might lose that hope. Default rates would grow, putting even more pressure on the banks to slow down lending. The further slowdown on lending would put more downward pressure on home prices. Rinse. Repeat.

In short, we could be looking at a downward spiral on home loan lending and home prices, thanks to sloppy paperwork by the banks that, in the rush to make new loans during the housing bubble, failed to make sure they were meeting legal requirements for perfecting and transferring mortgage interests in homes. It’s a mess the banks made—but the price of which may be visited upon many homeowners.

The downward spiral is what took out the subprime areas. Will the alt-a and prime be next? It's starting to look that way.

IT WAS the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way.

The period of the housing bubble was a time of contrasts. The belief was that prices were normal and that they would rise forever; the reality was that prices were inflated and rising based on foolish emotion and greed.

Today's featured property is the tale of two successive HELOC abusing owners. The first spent $100,000 of his equity but still found the greater fool to give him even more. The second owners spent $120,000 of their equity only to go into default as their imagined equity evaporated.

Owner number one purchased this property on 11/28/2000 for $425,000. He used a $297,500 first mortgage and a $127,500 down payment.

On 7/15/2002 he refinanced with a $350,000 first mortgage.

On 4/14/2003 he refinanced with a $397,500 first mortgage.

Mortgage equity withdrawal was $100,000 which was most of his down payment.

The property records are unclear, but based on the HELOC information of the next owners, it looks like the property was sold on 7/19/2004 for $655,000. Despite the first owner withdrawing and spending his down payment, he still walked away with double what he put into the property. I think that kind of borrower behavior is foolish, but when people were rewarded for it during the bubble, I can see why everyone started doing it.

The next owners pick up with a $131,000 HELOC on 7/19/2004. Assuming this was a purchase money mortgage that represented a 20% of the purchase price, this property sold for $655,000. This couple increased their HELOC to $250,000 on 11/16/2005 and withdrew $129,000. They imploded in spring of 2009, and two loan modifications later, they are trying to sell.

Foreclosure Record

Recording Date: 07/09/2010

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 06/28/2010

Document Type: Notice of Default

Foreclosure Record

Recording Date: 09/18/2009

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 08/18/2009

Document Type: Notice of Default

Loan owners in California have become accustomed to spending their equity. In their minds this is now an entitlement. It's one of the perks for living in California and taking on those oversized mortgages. As long as this belief persists, and as long as lenders enable this foolishness, we will continue to have cycles of booms and busts that periodically enriches everyone and imperils the banks.

I had the same question. Why is this lawyer being allowed to practice some form of alternate universe law?

He even claimed that he was going to have armed people escort the family back to break into the house again. LOL. That’s not a dumb idea at all! I’m sure the cops will see your guns and quiver in their boots!

Why does the mainstream press continue to categorize the foreclosure problem as one of ‘sloppy’ paperwork?

They broke laws and knew they were breaking laws – it was fraud. How come so few actual notes are turning up? Note, note, where’s the note? They were burned, shredded or buried (or all three). The notes will not be found.

Yes, the borrower who isn’t paying should be foreclosed on. But, by whom? Who actually is in possession of the note?

I am assuming that you aren’t a lawyer. Or, in any event, you aren’t familiar with foreclosures in California.

You do not need possession of the note to effect a lawful non-judicial foreclosure in California. In fact, one attorney who was behind this movement lost his law license after filing thousands of these lawsuits in California. He also settled with the state of California by agreeing to pay over $1 million dollars in restitution to defaulted borrowers who paid him.

I was a lawyer representing servicers and lenders in many of these lawsuits that were filed against my clients. I will tell you that we had EVERY SINGLE NOTE in our possession in these cases in the event some judge actually said that we had to “produce the note.” But, that is not the law and we were NEVER, not one time, required to “produce the note.”

This is a dead movement. The argument has shifted to one of assignments (this is why the paperwork is an issue). This argument will also fail for these defaulted borrowers. At best for these defaulted borrowers, it will simply delay lawful foreclosures.

If you are not required to produce the paperwork… exactly what stops someone from foreclosing on property for which they do not hold the mortgage.

I mean, if I don’t have to show documentation that I’m the person owed money on the mortgage on the property… this seems like a serious problem. Even if I could prove that the mortgage isn’t being paid, if I don’t hold the mortgage, I certainly shouldn’t be allowed to take possession of the property.

Does this all rest on the supposed “good faith” of bankers not to make claims related to mortgages that they don’t hold?

Well for all of this obvious “fraud” that ignited the nation’s righteous indignation a couple of weeks ago – it sure is becoming less and less of a story these days. You know the media is out there looking for victims to create a great sensational story. It seems that they sure aren’t finding a whole lot…

So what if the paperwork was “robosigned” – it doesn’t change the fact that you stopped paying your damn mortgage 2 years ago.

I am tired of hearing about this non-issue. Let the foreclosures resume immediately. Hire more robosigners and get these people out of our houses.

You are absolutely right – I am not a lawyer. But what happens if all the notes were purposely destroyed?

I also think the foreclosure process will be drawn out even further than it already is. And, what will be the repercussions of that? I think it will be bad for the market – it introduces more uncertainty on top of what is already out there.

Buyers will become more reluctant. More people will do strategic defaults (after all, they can stay in their homes for years and not pay).

And all those holders of the securitized mortgages will attempt to put those back to the banks.

There are legal procedures and mechanisms in place in the event that a note is lost or destroyed. It’s an easy fix. But again, I never handled a case where we didn’t have possession of the note and I handled a lot of cases.

Based on what you have stated, I’m not sure what grounds there are for your statement that “all of the holders of the securitized mortgages will attempt to put those back to the banks.” Simply because there are delays in foreclosures and uncertainty in real estate markets?

Explain to me what a “doctored note” is. The first thing that comes to mind is that BOA sees that AZDavidPhx paid cash for his place. They didn’t like that so they conjured up a mortgage note and foreclosed him in order to steal his property.

Is that what you are claiming the banks are up to?

Or are you just playing games with semantics? The debtor signs the note and the bank destroys it. So what? That does not entitle Joe Deadbeat to stop paying the loan. The bank then reconstructs the note. OOOOOO! Scandalous!

This “Show Me The Note” garbage reminds me of the old miranda rights myth that went something along the line of if the police did not read you your rights then you cannot be convicted of a crime. The criminal sitting in court admitting that he committed the crime but arguing that his rights were not read to him so he should be free to go.

Same difference, the house debtors admitting that they are in default but claiming they should not be evicted because the original note was not read to them.

And all these sheeple going along with this nonsense because they are so blinded by their banker-hatred.

I’m waiting for a website to come along that will take your zip code and lender and give you “Average Squatting Time” based on your situation. The real time AST could help individuals decide whether or not to squat. Advertisement space on the site could be sold to attornies, BMW dealerships and RV dealerships.

That’s a reasonable business idea. You also want to buy that shiny new car before your credit is shot (because you won’t be able to after a couple missed payments, but also, to help rebuild your credit score faster).

Depends on the jurisdiction. Local laws and ordinances apply. In Chicago, it will almost certainly take at least 4 months if the lessor moves on the situation very quickly and follows procedure to the letter, and evictions cannot take place during the deep winter months, particularly if children, elders, or disabled or ill people are involved.

In St. Louis, it took perhaps 3 months at the most for non-payment.

Best to know your local rental laws very well if you want to play landlord with your underwater house. A procedural error can result in the tenant poaching an entire year’s free housing off you, or suing you for a largish sum of money. Any landlord who tries to negotiate this situation without competent legal assistance is suicidal.

“Anyone who is not already over-indebted, has a job, and has good credit can borrow plenty.”

I. R. I am one who meets those criteria, but I just don’t want to borrow again. After 2 1/2 years of readership, I am on a continuous path of de-leveraging that will last several more years. I often observe here that my generation is held liable for much of this mess, but I am of the opinion that we do not represent the majority of the HELOC abusers. That said, I beleive that my generation has committed some dreadful errors in planning (not planning) for retirement, bordering on magical thinking. By the simple act of long term de-leveraging, I am keeping a portion of my income out of the economy. Aggressive savings takes more out.

Had I not sipped some Kool-Aid earlier, I wouldn’t be engaged in such a thrifty regime now. What saved me was never exceeding a 50% LTV at any time. Better late than never.

In my experience, each and every one of the heloc abusers I’ve personally met is a member of your generation.

Every one.

From paying their kids’ student loans and college costs (rather than require their kids to work through school or earn grants) to plastic surgery to spa vacations to Escalades or tricked-out Explosions with spinner rims to $100k per year living expenses to continue the facade despite a job loss – yep – your generation did it all.

It was as though these people were either tempting fate or trying to establish their own reality….very sad and I fear for my country.

Banks make money by lending it. If there is a lack of customers with sufficiently high scores, the banks will adjust their standards downward accordingly. If nearly everyone has garbage credit, then garbage is the new normal, and will be deemed creditworthy.

I believe what you propose in jest will actually be the case. Borrowers more than 2 years out of foreclosure will be eligible for decent rates.

Yes, with each new loan, the banks are indeed literally making money ( out of thin air ). Why aren’t the lawyers for these defaulters barking up the “unlawful consideration” tree?

The entire real estate “lending” game now is all about what the banks can dump on the taxpayer if things don’t work out. If too many people have bad credit scores then the tax payer will have to insure more “loans”. The Government shall step right up and do so for the sake of “helping” us continue to prop up prices.

I suppose at some point nobody will want to use our currency, but let future administrations deal with that problem when the time comes.

“That is one of the first acknowledgments of the plight of new buyers I have seen in the media. Everyone is so focused on helping out the deadbeats being foreclosed on that we forget that a new buyer — a buyer willing to pay the mortgage — is waiting to move in to their new home. The idea that delinquent borrowers should have their debts forgiven because of a procedural error is ridiculous.”
Hey, that is definitely a move in the right direction!
How about a Class action against the banks who resisted (most of them!) the market correction to allow buyers to buy a house at a fair price by withholding inventory from the market? I’m sure will be plenty of victims, I’m one! IR, you have hundreds of examples of properties with troubled mortgages that are not timely foreclosed on, aren’t you?! Any lawyers out there want to tackle a case like that?

Where were you when we were discussing about knife catching will result in deep and serious personal financial losses? Because of your knife catching action, the market stays at the same elevated WTF level. Could we sue you and the knife catchers for keeping the market at such elevated WTF level?

Dude,
WTF are you talking about?
Can’t you read?
I sad I’m a victim because I don’t want to buy a house at the WTF price and banks prevent prices from coming down! I’ve been renting since 2004 and patiently waiting for the unavoidable correction. Now, thanks to amend-extend-pretend by the banks and all this foreclosure-gate bulls…t lately, who knows how much longer this will drag. What knife catching action are you talking about? I could buy the house I rent in Irvine for cash – but I refuse, because of the above…. So, thanks for adding insult to the injury!

Now the next level down begins to appear. Newport Coast, Laguna, and anything coastal – oh and Irvine are now slowly experiencing what took only months to happen in other areas. These area owners have more resources and will hold on longer and endure more pain in general. Prices may ‘spike’ lower but, are more likely to experience a slow grind lower to a true equilibrium with income and savings.

I’ve said it before. This is the worst time to buy a house in our area in 100 years. You can buy now and get an artificially low rate of 4.25% on a 30 year fixed only to try and sell 10 years from now to someone who has to buy with a 7.5% 30 yr fixed. This will take 30% plus of purchasing power and carrying costs. You will loose money after a decade of owning! Don’t believe it??? Look at Japan! We are becoming Japan… 25 years of slowly depreciating RE.

I can’t say whether it is so or not, but there is a notable difference between the U.S. and Japan. We are experiencing population growth — and in particular, population growth of young people.

While we have our own demographic mess coming, it is much less severe than Japan’s.

Our population-growth ponzi scheme may work for many more decades before leaving some (potentially as-yet unborn) generation holding the empty bag.

Or it may all blow up in the next couple of decades if we do something to make the U.S. an undesirable place for immigrants. (Since our birth rate isn’t high enough even to keep a constant population, let alone a growing one).

I’m definitely an amateur here, since I was still in school the last time buying property made a lick of sense…

But, the article says that people will be able to buy title insurance on these properties… but does title insurance routinely protect against all possible problems? Or are there exceptions, like in all of the other types of insurance that I carry?

Also, limitations? Is the coverage just for purchase price? Would it also cover the cost of any legal action?